goethe business school chapter v: growth and employment a.accounting for growth b.efficiency of...

Goethe Business SchoolGoethe Business School

Chapter V: Growth and EmploymentA. Accounting for Growth

B. Efficiency of Labor

C. Solow model and interpretation

D. The labor market

E. Real wages

F. Population and migration


2

Labor market equilibrium According to the macro analogue of

microeconomic analysis, equilibrium is established through the real wage bringing labor supply and demand in line

This analogue is fallacious though, because labor markets are heavily regulated, which could entail market disequilibria

As a benchmark, the labor market equilibrium concept is useful however


3

Decomposing employment

Let’s look at some specific elements of the labor market

Total hours worked per population can be decomposed as follows:

€

ΔH

Pop=

ΔH

ΔWorker

⎧ ⎨ ⎩

⎫ ⎬ ⎭

ΔWorker

ΔLabor force

⎧ ⎨ ⎩

⎫ ⎬ ⎭

ΔLabor force

Pop

⎧ ⎨ ⎩

⎫ ⎬ ⎭


4

Trends in hours workedper capita

Hours per capita Hours per worker Employment rate Working-age share of total population

Source: OECD Employment Outlook, 2004

Trends in hours per capita have diverged since 1970

Percentage change 1970-2002

-30

-20

-10

0

10

20

30

FranceFinlandGermany

JapanSpainBelgium

EU-15Denmark

Italy

Netherlands

United Kingdom

NorwaySwedenOECDIreland

SwitzerlandAustralia

IcelandCanada

New ZealandUnited States


5

Measuring unemployment Measuring unemployment is tricky

and far from uniform throughout the world An unemployed person must be

In employment age and capable to work Willing to work at the going wage, everywhere Willing to retrain where skills do not match demand

Part-time and multiple jobs add to complexities Workers might be discouraged and leave

the labor force Workers could become “self-employed” Unemployment is linked to “labor participation”


Growth and unemploymentin the European Union

7


8

Labor market movements

1,17

0,18

1,16

3,64

1,21

0,15

1,49

2,92

0

1

2

3

4

5

6

7

1 2

West Germany: Entry and Exit into Unemployment

Dependable employment

"Reserves" (discouragedworkers, among others)

Self-employment

Non employment

Zur Anzeige wird der QuickTime™ Dekompressor „“

benötigt.

Entry from..

Zur Anzeige wird der QuickTime™ Dekompressor „“

benötigt.

Exit to ..

Total 6.15 million

Total 5.77 million

Source: Thomas Rothe, IAB


9

Definition of“natural unemployment” N is the size of the labor force, L is the number of

employed, and U the number of unemployed The ratio of hiring is h, and the ratio of firing f In a dynamic equilibrium (steady state)

the following must hold

h×U = f×L or h×U = f×(N-U). And

€

hUN

= f 1−U

N

⎛

⎝ ⎜

⎞

⎠ ⎟⇒

U

N=

f

h + f


10

Example:

Consider the following example: We assume that 2 percent

of the employed lose their job every month (average job duration = 4 years)

20 percent of the unemployed find a new job (average duration of unemployment = 5 months)

Then the “natural unemployment rate” is

[0.02] / [0.02 + 0.20] = 0.0909 (or 9.1%).

€

hUN

= f 1−U

N

⎛

⎝ ⎜

⎞

⎠ ⎟⇒

U

N=

f

h + f


11

NRU and economic policy You can reduce the NRU only

by reducing f or increasing h But f and h are “behavioral” parameters

of the private sector Economic policy can create incentives,

but the incentive structure is highly complex We discuss two policies:

Employment protection regulation (EPL) to reduce f State employment and wage subsidization to increase

h


12

Example: EPL Protection against dismissal (extreme f = 0 ) can drive

firms into bankruptcy (respectively Chapter 11 in the United States)

Moreover such costs are anticipated by firms and “capitalized”, i.e. wage levels are lower

It could lead to a reduction of hiring new labor force, combined with overtime of existing staff

It could also explain the high incidence of temporary work in some countries

EPL does not necessarily entail a psychology of job security


13

Unemployment insurance Insurance against unemployment is more

effective in providing subjective job security It is effective to combat cyclical unemployment Where there is substantial structural

unemployment, unemployment insurance adds to non-wage labor costs, and the scheme may become unsustainable over time

Moreover, unemployment insurance could entail “moral hazard”


14

State intervention Government can increase h by hiring people

in the public sector It can also subsidize wages in the private sector In both instances the financing of government

programs has to be skimmed off production I may entail negative incentives and distort

wages Financing such measures through government

borrowing is not sustainable over time


15

Real wages Real wages equal marginal productivity

in theory, but they also depend on the supply for labor function in market equilibrium

In practice however total factor productivity is often apportioned independently from the labor supply function

We shall look at two extreme cases The market for unskilled labor The market for highly skilled labor


16

Unskilled labor: A historical review

W/P = real wage

Hours worked

Su

bsi

sten

ce level

Marx’s “Industrial

reserve army”

H*

Labor demand

F. Lassalle1825-64


17

Unskilled labor and the wage rate As long as the supply for labor function

is flat, increases in the productivity of labor do not filter into the wage rate, but have a pure employment (quantity) effect

Conversely, if the supply for labor is scarce, as for highly qualified and specialized labor, any productivity increase is fully reflected in the real wage


18

In the “Third World” there is typically a “dual” labor market characterized by A limited supply of qualified workers,

who are also often well organized A large number of unskilled workers

less well organized Arbitrage between the two markets

is virtually impossible It produces significant wage differentials

“Dual” labor market


19

“Dual” labor market and increase in productivity

(W/P)1

L1

(W/P)2

L2

Wa

ge d

iffer

en

ettia

l

Ls Ls constant

As productivity increases, the

wage differential becomes larger


20

Productivity increase and “trickling down” Total factor productivity has increased

tremendously in industrialized countries And less skilled labor was not “left behind” Productivity increase has “trickled down” to all

wage categories, not just the most productive An important factor was broad compulsory

education and participation in training Another factor was “organizing labor”

(and social policies)


21

Dependency between skills and employment

Training and employment rates are correlated

Employment rate

Training participation and aggregate labour market performance, second half of the 1990s

NOR

CHE

DNK

USA

SWE

NZL

CZE

GBR

CAN

PRT

NLD

AUS

FIN

AUT

DEU

FRA

IRL

POL

BEL

GRCHUN

ESPITA

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

50,00 55,00 60,00 65,00 70,00 75,00 80,00 85,00 90,00

Employment rate %

Training participation %

Correlation : 0.63 ***

Source: OECD


22

Organizing labor Obviously, the market mechanism creates

inequality, which may lead to social tensions Almost all countries attempt to counter its effects The instrument is the standardized work contract

and collective bargaining It attempts to allocate total factor productivity

among various groups of skill in a “fair” manner All wage groups are tied together in fixed

relativities, wages are negotiated collectively, and productivity increases distributed evenly


23

Collective bargaining and labor union density

Source: OECD

Percentage of wage and salary earners

Union density and coverage, 2000

Australia

Austria

Belgium

Canada

Czech Republic

Denmark

FinlandFrance

Germany

Hungary

Italy

Japan

Korea

Luxembourg

Netherlands

New Zealand

Norway

Poland

Portugal

Slovak Republic

Spain

Sweden

Switzerland

United Kingdom

United States

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

90,0

100,0

0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0 80,0 90,0 100,0Trade union density (%)

Collective bargaining coverage (%)


24

Collective bargaining and “sticky” wages Collective bargaining introduces an

element of “stickiness” in wage setting For most, wages are reasonably in line

with productivity, for others they may be too high or too low If they are too high, this tends to create

unemployment If they are too low, qualified people could

migrate


25

“Minimum” wages andunemployment

L

W/P

“Sti

cky”

real w

ag

e

Labor demand

Labor supply

Unemployment


26

“Efficiency wages” The theory is based on the hypothesis that

higher wages could also increase productivity

It recognizes that a standard work contract can never be fully defined

The wage becomes an “instrument” to incite workers to fully and efficiently comply with their duties that are specified in the contract only vaguely


27

Sam Goldwyn (movie producer)

about one of his best agents:“We are overpaying him, but he’s worth

it”


28

Higher wages are supposed ...

..to reduce transactions costs that could result from frequent turnover of personnel

.. to keep in particular qualified personnel “on board”, and to counter problems of adverse selection of staff

.. to increase the motivation and work effort of staff, and to contain the problem of “moral hazard”

Efficiency wages will aggravate inequality between skilled and unskilled labor


29

“Dual” labor market, efficiency wage, and collective bargaining For a “dual” labor market with less qualified

workers (or “outsiders”) and more qualified workers (“insider”); and

Wages being lumped together through standard work contracts for collective bargaining; and

Qualified staff (or “insiders”) enjoying efficiency wages, but less skilled staff (or “outsiders”) not; then

A wage increase will produce unemployment


30

“Dual” labor market,and collective bargaining

L1 L2

Lin

ked

by

con

trac

t

(W/P)1

Unemployment Employment increase

(W/P)2 Wage increase is“validated” throughhigher productivity


31

“Relative” wage stickiness Not “absolute” wage stickiness will produce

unemployment, but “relative” wage stickiness The model also explains the coexistence

of “unemployment” and “over-employment” (overtime work) at the same time

It also elucidates, in collective bargaining, the lack of employers’ resistance against real wage increases

Collective bargaining will also affect different groups differently: women, the young, the old


33

Rise in real wage dispersion Industrialized countries will experience

a rise in real wage dispersion Its main causes are

Increased arbitrage in labor markets in a globalizing world, especially for services

A skill biased technical change of the production function, which favors highly trained work force

Globalization will also induce migration


Lester Thurow (1993)

“If capital is borrowable, raw materials are buyable and

technology is copyable, what are you left with if you want to run a high-wage economy? Only skills;

there isn’t anything else.”


35

Reading

Abel, Bernanke and Croushore,Chapter 3.4 and 3.5


Readings

Reading 5-4 “Labour pains”The Economist, September 21st 2000 (a bit dated by now, but still interesting)

Reading 5-5 “The dark side of globalisation”, The Economist, May 29th, 2008

36


37

Discussion 5:Understanding the global labor market

What characterizes the global market for labor?

Should firms only look at wages when making investment decisions at an international scale?

How will globalization impinge on the labor market of the 21st century?

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